Question

What is opportunistic disinflation and what provides the opportunity? Explain how the process works.

Answer 1

The central bank can exploit the opportunity created by the positive supply shock which leads to disinflation. This positive supply shock leads to the rightward shifting of the supply curve, which results in an increase in output and decrease in the prices. The cnetral bank respons to this by raising the interest rates , this then shifts the aggreageate demand curve to the left. This leads to a fall in the output level, which creates a recessionary gap, which further leads to a downward pressure on inflation and the inflation falls to the lowest levels. So, this positive suply shock, helps policy makers lower the inlftaion to minumum levels without an actual recession happening.